Peak Margin-Enrich

One keen market analyst who is into Stock Trading seems to have said that Traditional ‘Value’ investing is dead !

What then is the need of the hour that traders and investors find allure in, in 2021? Something that obviously gives negligible importance to Value of a stock . So, they try to find the X-Factor in Stock trading that does not merely ask for doubling or trebling of stock value in say 2 or 3 years. Instead, they look for stock that can be phenomenal winners, ie price appreciation of 100% or more, called the Multibaggers. Not just one of its kind. A host of them to build the cornerstone of their portfolio.

What is multibagger stocks

Multibagger stock is a name coined by Peter Lynch, in his bestseller ‘One up on Wall Street’ where he refers to small-cap stocks which are able to multiply in terms of ‘no of bags’, each bag representing stock appreciation that is doubling in original value. Thus a 10-bagger would refer to a stock which appreciates ten times its value.

Historically in Stock Trading , Value stocks refer to those that are viewed as ‘Undervalued’ or trading below their intrinsic value, but with strong fundamentals. Now the exponents of ‘Multibaggers’ bring up the concept of ‘Growth investing’ as against ‘Value investing’ as a priority. With the huge increase in traded volumes in Stock trading, pure value investing opportunities are few and far between and not available for long. Cheaper stock that remain underpriced long, may lead to a ‘Value trap’ which are not investment worthy.

Peak Margin-Enrich

Conversely, Multibaggers would be companies which are on a fast-track stock trading growth trajectory, even if the valuation shows a degree of overpricing in the short run, vis-à-vis its intrinsic value. Though this may not be the original concept when the term was first used, the attractiveness of Multibaggers depend on the holding periodof the stock, before it is able to appreciate to this extent. The shorter the holding period, the larger the ‘bagger’ and the smarter the investor.

Tips to identify multibagger stocks

Peak Margin-Enrich

‘No Research without action and No Action without Research’ is a dictum that pays rich dividends in case of investments in stocks while online stock trading , especially so for Multibagger Stock trading . Research of even the most simplistic nature could reveal growth potential of stock and its future growth prospects in following parameters:

a.Earnings potential demonstrated through consistent track record of high Earnings per Share (EPS) which is also available at a reasonable price ie. a low PE ratio (Price to Earnings)

b.Screening stocks using the Graham Multiplier formula, to find stocks <22.5 which is arrived by:

PE X PBR

(where PE = Price to Earnings Ratio & PBR = Price to Book Value Ratio)

c.Cash flow comfort in the short run and Leverage enjoyed through low Debt/Equity ratio (not > 2.5)

d.Efficient management of the business by a strong and reliable team

Competitive advantage the company enjoys which is demonstrable through product and services that could stay sustainably in the forefront in the coming years

A robust future for the industry the stocks fall under.

Risk Involved in multibagger stocks

If Multibagger stocks are identified as potentially fastmoving ones in shorter time-frames, then they could be susceptible to untoward reversals and collapses as well, being highly sensitive to market ripples. Their risk-reward ratio is high making them not dependable till they deliver profits

Overvalued stocks with indicatives like high PE(Profit to Earnings), Low liquidity, earnings constraint etc.

Belief systems based on market recommendations available on stock trading apps that Multibaggers will turn a person a millionaire overnight, when investment is not analysis backed

False notion that cheaper picks in market (penny stocks) have greater growth potential than value stocks

Conviction that even if the market is bearish, Multibaggers will defy the general trend

Given the fact that holding period before reap could be uncertainly long, it is unwise to stop monitoring the financial health of the investments. All Multibaggers may not be fruitful in the timeframe planned and sometimes exit timing could be unanticipated

While not exiting such stocks in case of adverse signals would be a mistake, so too would be, an impatient attitude as many Multibaggers take time to yield their true potential. Some take negative turns before bouncing back and need the investor to understand the market factors and their future upside prospects, to stay invested.

Tips to avoid risks

Timing of entry for trading in a stock is very crucial. Traders must avoid getting caught in a bull trap in times when stocks ‘apparently’ break a resistance level, but after multiple attempts find themselves in a bear market. Build-up of momentum must be strong enough to avoid it.

Reasonable price levels and valuations must always be aimed for, while buying Multibaggers. Else, the profits get muted and the investor is unable to harness the growth potential, even after finding the right stock.

Source of tips and recommendations received must be checked and found to be authentic, in order to avoid investment losses. Even the best stock trading platform cannot make up for unreliable information.

Research time and trade timing errors could be avoided by trading in Exchange Traded Funds (ETFs) which proxy the stock or sector being identified, where liquidity issues are faced in a market.

Most of these wisdom would be applicable equally well to Stock and Commodity markets’ trading

Frequently Asked Questions

Peak Margin-Enrich

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Peak Margin-Enrich

Trading for a beginner should be a cautious process wherein one must familiarize oneself with all terminologies and understanding of the process clearly.

The basic infrastructural prerequisites are opening of a Demat account with a DP and an Online Trading account with a Broker, preferably through a stock trading app.

The beginner must start trading with a training software available on a best stock trading platform that can be used on mock trades, in order to get familiarity and hands-on practice.

Before takin the plunge, traders must get used to interpreting technical and fundamental analysis on a periodical basis, to devise practical strategies to initiate open positions. He must also set down various limit order parameters depending on his risk tolerance.

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Almost every analyst into active online stock trading, swears by his or her own theory on how to bag a Multistock, but there is no single success path that can be fool proof. However, traders look for Industry specific add-ons to portfolio and focus in the next 5 years for accelerated growth would be, IT,

Peak Margin-Enrich

Pharma & Lifesciences, Infrastructure, Banking and Chemicals. Auto in the E segment is set to make fast strides.

However, if the target is small and mid-caps the first 3 above would be the space to look at.

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Peak Margin-Enrich

The best Multibagger stocks would be those that show excellent growth potential in terms of proven Earnings year after year and at the same time whose stocks are available at a price below their intrinsic value. This would show that:

Adequate growth prospect is assured to the investor in reasonable time and

Market price catch-up based on fundamentals as well as intrinsic valuation mark-up can be factored into the price appreciation planned to be harnessed by investor

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A stock, whether it be small or mid-cap, can be termed a Multibagger, if it can have a visionary management, pioneering business model and the requisite financial indicators which show pace of Price to Earnings outstripping market price growth. To be a Multibagger, the stock should have the momentum to grow at an outstanding speed which runs into multiple of 100s to its original price.

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